CBS Deal Ends Time Warner Cable Blackout Ahead of NFL

Sept. 3 (Bloomberg) -- CBS Corp. programming returned to
Time Warner Cable Inc. in time for the start of the National
Football League season, as the companies ended a one-month
dispute that blocked service to pay-TV subscribers in New York,
Los Angeles and Dallas.

Time Warner Cable agreed to pay a significant increase for
the right to carry CBS, though still below $2 per subscriber per
month, according to people with knowledge of the situation who
asked not to be identified because the terms are private.

The accord ends a stalemate that left more than 3 million
Time Warner Cable subscribers without access to shows ranging
from “Under the Dome” to U.S. Open tennis. CBS and other TV
networks are demanding higher fees for broadcast signals and
looking for new ways to sell digital rights. That’s squeezing
pay-TV carriers like Time Warner Cable, which also are grappling
with competition from Web-based services such as Netflix Inc.

“Hard to believe this isn’t a CBS victory,” said Richard
Greenfield, an analyst with BTIG LLC in New York.

CBS shares rose 4.7 percent to $53.50 at the close in New
York, its biggest one-day gain in more than seven months. Time
Warner Cable rose 1.8 percent to $109.25.

Smithsonian, Showtime

Time Warner Cable will resume carrying local CBS stations
and channels such as Smithsonian, CBS Sports and Showtime on its
systems, according to a statement yesterday. The companies
didn’t announce terms of the deal, which also covers Showtime
Anytime and video-on-demand for stations in New York, Los
Angeles and Dallas.

Showtime Anytime allows subscribers to view the premium
channel anywhere on tablets and mobile phones. Time Warner Cable
failed to obtain other out-of-home rights to CBS’s programming,
the people said. CBS may later try to sell those rights
exclusively to an online player like Google Inc. or Apple Inc.,
they said.

“While we certainly didn’t get everything we wanted,
ultimately we ended up in a much better place than when we
started,” Time Warner Cable Chief Executive Officer Glenn Britt
said in a statement.

Britt called on Congress and the U.S Federal Communications
Commission, which got involved in resolving the dispute, to
reassess the 1992 retransmission consent rules that allow
broadcasters such as CBS to charge cable companies for signals
that are delivered free over government-owned airwaves.

‘Out of Date’

“The rules are woefully out of date, are the primary
reason cable bills are rising, and too frequently leave our
customers without the programming they love,” Britt said.

While the FCC didn’t take action, the dispute may have
planted the seeds for an update of the rules, Greenfield said.

“The disequilibrium that currently exists is not
sustainable,” Greenfield said. “We expect change.”

While costs rise for U.S. pay-TV providers, they’re seeing
customers defect. Cable providers lost 607,000 customers in the
second quarter, according to research firm SNL Kagan, with Time
Warner Cable alone dropping about 190,000. The quarterly decline
for Time Warner Cable was its largest since 2009, according to
data compiled by Bloomberg.

CBS is the highest-rated broadcast channel, ahead of
Comcast Corp.’s NBC, Walt Disney Co.’s ABC and 21st Century Fox
Inc.’s Fox. The network, which begins broadcasting Sunday NFL
games for the new season this coming weekend, had asked for
prices that were 600 percent higher than other affiliates
receive for the same programming, Time Warner Cable said before
the blackout.

‘Fair Compensation’

The network retains flexibility in selling its content to
new Web-based providers, CBS CEO Leslie Moonves said in a memo
to employees.

“We are receiving fair compensation for CBS content and we
also have the ability to monetize our content going forward on
all the new, developing platforms that are right now
transforming the way people watch television,” Moonves said.

Sony Corp., Intel Corp., Apple and Google are all
developing pay-TV systems that would deliver cable-like
programming packages over the Web.

Time Warner Cable shut off CBS in Dallas, New York and Los
Angeles on Aug. 2 and blacked out other networks it owns --
Showtime, TMC, Flix and Smithsonian -- across the country. The
move followed weeks of negotiations and extended deadlines.

Stock Decline

During the blackout, shares of New York-based CBS,
controlled by Chairman Sumner Redstone, declined 6.3 percent,
while Time Warner Cable dropped 8.3 percent. Both stocks are
still up for the year, with CBS gaining 41 percent and Time
Warner Cable climbing 12 percent.

Time Warner Cable, based in New York, also had threatened
to remove CBS from its prominent position at Channel 2 in New
York and Los Angeles even if a deal was struck. The cable
provider aired the Starz Kids & Family network in its place for
the majority of the blackout.

The public disagreement focused on retransmission fees,
which have become a frequent sticking point in negotiations
between pay-TV providers and broadcasters. Last quarter, CBS
reported an 18 percent gain from a year earlier in affiliate and
subscription revenue, which includes retransmission fees. It
didn’t specify how much retransmission fees grew alone. In the
previous quarter, retransmission revenue had jumped 62 percent.

Programming Costs

Pay-TV operators will pay more than $3 billion in
retransmission fees this year, according to Kagan.

“This deal again demonstrates the value of content and the
leverage owners have when negotiating value,” John Janedis, an
analyst with UBS Investment Research in New York, said in a
note. CBS is positioned to meet a goal of $1 billion in
retransmission fees by 2016, he said.

The dispute touched on a number of issues that may
influence future negotiations between programmers and
distributors. Britt said in a public letter to CBS that the
network could offer its channels with a la carte pricing, a
proposal that Moonves called a “public relations gesture.”

Time Warner Cable also encouraged customers to sign up for
Aereo Inc.’s online service, which gives users access to
broadcast networks over the Internet for $8 per month with the
first month free. CBS has battled Aereo in court, alleging
copyright infringement.

The dispute also revolved around mobile rights. CBS agreed
to a three-year extension of its contract with Verizon
Communications Inc.’s FiOS to on Aug. 23 in a deal that didn’t
expand FiOS’s ability to show CBS in and out of the home. Time
Warner Cable initially sought more access to CBS’s mobile
rights.